T-803-85
Between
EDITH HEINZE,
Plaintiff,
- and -
HER MAJESTY THE QUEEN,
Defendant
REASONS FOR JUDGMENT
ROTHSTEIN, J.:
This is an appeal from a decision of the Tax Court of Canada. While there were a number of issues to be decided by learned Tax Court Judge, before me the parties agreed that the only issue to be decided is whether mortgage interest and property taxes relevant to certain farm land acquired by the plaintiffs are deductible by the plaintiffs in computing their income for the 1978, 1979 and 1980 taxation years. The relevant provision is ss. 18(2) of the Income Tax Act:
| LIMITATION RE CERTAIN INTEREST AND PROPERTY TAXES IN LAND |
| (2) notwithstanding paragraph 20(1)(c), in computing the taxpayer's income for a taxation year from a business or property, no deduction shall be made in respect of any amount paid or payable by the taxpayer in the year after 1971, as on account or in lieu of payment of, or in satisfaction of, |
| (a) interest on borrowed money used to acquire land, or on an amount payable by him for land, or |
| (b) property taxes (not including income or profits taxes or taxes computed by reference to the transfer of property) paid or payable by him in respect of land to a province or a Canadian municipality, |
| if, having regard to all the circumstances, including the cost to the taxpayer of the land in relation to his gross revenue, if any, therefrom for that or any previous year, the land cannot reasonably be considered to have been, in that year, |
| (c) used in, or held in the course of, a business carried on in the year by the taxpayer, or |
| (d) [Repealed.] |
| (e) held primarily for the purpose of gaining or producing income of the taxpayer from the land for that year, |
| except to the extent that the taxpayer's gross revenue, if any, from the land for that year exceeds the aggregate or all other amounts deducted in computing his income from the land of that year1. |
The facts are straightforward. The plaintiffs acquired farm land and buildings in 1978 for $130,000. A mortgage of $80,000 was required to finance the purchase. The land and buildings were subject to a lease under which the lessee paid rent of $2,500 per year. Although, the lease with the 1978 tenant was not renewed, a new lease with another tenant was entered into for the same annual rent thereafter. The plaintiffs say that they did not intend to farm the land at that time because they did not want to make an outlay for farm machinery and equipment until after the farm mortgage was fully paid. This would not be for about three years as the necessary funds were tied up in another investment for that period of time.
When asked why they would make an investment of $130,000. in farm land to gain gross revenue of only $2,500 per year, Mr. Heinze said the plaintiffs were concerned the price of land would rise and that in their judgment it was preferable to suffer losses for a few years holding the farm land rather than having to pay an inflated price to purchase it at a later day.
There is no evidence that the farm land was used or held in the course of a business carried on in the relevant years by the plaintiffs. Indeed, the plaintiffs say they acquired the land because of their concern of inflation and that they had no intention of farming until the mortgage was paid off and they could acquire farm machinery. In Daley v. Minister of National Revenue 50 D.T.C. 877(Exch. Ct.) Thorson P. states at p. 880:
| It seems clear that a disbursement or expense such as this which is laid out or expended not in the course of the operations, transactions or services from which the taxpayer earned his income but a time anterior to their commencement and by way of qualification or preparation for them is not the kind of disbursement or expense that could be properly deducted in the ascertainment or estimation of his "annual net profit or gain". |
In McLachlen v. Minister of National Revenue (1973), 74 D.T.C. 1035, (Tax Review Board) Lucien Cardin, Assistant Chairman stated at page 1037:
| However, the important point to consider in this appeal is the period of time at which the preparatory and planning stage of the appellant's project terminated and the actual farming operations began. I do not believe that farming operations can be considered as having started at the time the idea or the intention of farming was conceived, not at any stage prior to the actual operations of the farm. |
I think these precedents are applicable in the present case. The plaintiffs were not in the farming business in the relevant years.
Nor could they be considered to be in the rental of land business. Considering the cost of the land and buildings of $130,000 and the gross revenue therefrom of $2,500 per year before other expenses, it is obvious the rental of the land and buildings was not a business. The rental was received to reduce the losses the plaintiffs were incurring while waiting to pay off the farm mortgage, acquire farm equipment and machinery and start the farming operation.
Was the land held primarily for the purpose of gaining or producing income during the relevant years? The plaintiffs admitted that the sole purpose for holding the land was to use it for a farming operation when the mortgage was paid off and farm machinery could be acquired. It is obvious from the minimal gross revenue the plaintiffs obtained in the relevant years that it was not being held in those years for the purpose of gaining or producing income. Accordingly, it cannot be said that the interest and property tax expenses were being incurred for the purpose of gaining or producing income in those years (see for example Deputy Minister of Revenue of Québec v. Lipson, [1979] C.T.C. 250 (S.C.R.).)
The appeal must be dismissed.
"Marshall E. Rothstein"
Judge
Toronto, Ontario
April 21, 1997
FEDERAL COURT OF CANADA
Names of Counsel and Solicitors of Record
COURT NO: T-803-85
STYLE OF CAUSE: EDITH HEINZE
- and -
| HER MAJESTY THE QUEEN |
DATE OF HEARING: APRIL 7, 1997
PLACE OF HEARING: TORONTO, ONTARIO
REASONS FOR JUDGMENT BY: ROTHSTEIN, J.
DATED: APRIL 21, 1997
APPEARANCES:
Mrs. Edith Heinze
For the Plaintiff
Mr. Eric A. Noble
For the Defendant
SOLICITORS OF RECORD:
Mrs. Edith Heinze
49 Doon Road
Kitchener, Ontario
N2G 3C9
For the Plaintiff
George Thomson
Deputy Attorney General
of Canada
For the Defendant
FEDERAL COURT OF CANADA
Court No.: T-803-85
Between:
EDITH HEINZE
Plaintiff
- and -
| HER MAJESTY THE QUEEN |
Defendant
REASONS FOR JUDGMENT
__________________
1 Until November 16, 1978 paragraph 18(2)(c) read: (c) used in, or held in the business of, carrying on a business by the tax payer other than a business in the ordinary course of which land is held primarily for the purpose of resale or development, or The words that were subsequently deleted from paragraph 18(2)(c) have no bearing on this case.